A few responses.
I honestly think that mixer choice is probably the most important decision. For me the only controller's mixer section that I've felt that comes anywhere close to feeling right is the xone:dx. It feels better than a lot of real mixers and makes every other controller I've felt feel like a toy…including the Vestax ones for some reason (I normally love vestax mixers). I'm not sure that anything will make me give up having a mixer. The VCM-600 was close, but it was always an expensive compromise.
Itch vs. SSL vs. Traktor vs. whatever is just a preference thing. Frankly, I don't fault you for pirating Traktor before you boy it as an extended demo. 30 minute limits are annoying, more so than 30-day limits and almost as much as crippled versions. I have bought and sold SSL at a loss twice. The idea of it is amazing to me, but in the end…it just doesn't jive with what I do. Traktor didn't either until a few months ago…now I'm wondering if I'll ever do a full DJ set in Live or actually start on working live production stuff into my set. My advice: try everything, even if it means limited versions, shady methods, or bugging the crap out of GC employees while you try to spin a set on demo equipment…it's not the worst thing that happened to them at work that day, I promise.
If you do decide to go the CD route, there's nothing wrong with just burning CDs or using a USB key if you can. I have to disagree with will (whom I greatly respect) about CDs. It is a step backwards in some senses ( looping (anything), quantization (Traktor, Torq, Live), remix capabilities(Live) ). But in the end, all DJs do is play other people's music in a (hopefully) unique, creative, and entertaining way. Whatever tools you use, use. I think that it's a LOT easier to learn how to be really good on CDs or Vinyl just because there's less you can do to truly mangle a good song, though it's obviously not universal (will is an example).
In addition, I find it easier to stand there and wait for a track to play out the way I want with CDJs in front of me than with a laptop in front of me. It's a personal problem, and it's responsible for me leaning a bit away from Ableton recently. If you find yourself constantly needing things to do while mixing on a computer or ruining tracks with cue points and effects, CDs might be the answer at least for a while.
While you're in that $~500 price range, however…if you can, give the Reloop RMP-3 a play. I've heard some really good things about it from at least one person I trust. It seems to be an almost-built-as-well-knock-off CDJ-1000 that can control Traktor if you choose for it to, does some effects, and apparently handles in a class close to top-end Pioneer decks of not too long ago…for $500.
I'm not advocating buying them blind, but they might be worth looking into. I'm probably going to pick one up in a few weeks because I kind of want to learn to scratch. I'm also just really curious. The guy who recommended them to me is very good, and we tend to agree on equipment a good bit of the time with obvious concessions because we spin very different genres.
Sorry about the wall of text…I can't sleep.
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